In focus: Upside breakout

By Lawrence G. McMillan

The new year started with a strong rally, although the reasons for the rally were less than stellar. Basically, I think one can say that the reason investors bought on Tuesday was that it was the first trading day of the year.

It just seemed that a certain amount of cash-laden traders were holding back until the new year started. I suppose, in some cases, this was because they didn’t want to take any risk on the year-end P&L, so they didn’t buy last week, but waiting until this week. But since there was any news-based or fundamentally-based reason for the rally, it didn’t have a particularly strong look. For example, Tuesday was not a “90% up day.”

As a result, the Standard & Poor’s 500 Index SPX broke out over its 200-day moving average and over the trendline connecting the recent market tops. We have mentioned in the past that the 200-day moving average has been receiving a lot of publicity, and thus the breakout should draw in some sideline buying. Moreover, the bears tried to take advantage of the rather weakly-backed rally and sell the market off today. To the bulls’ credit, they held their ground and pushed the index back into positive territory.

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